“Left” Field

I participate in a number of LinkedIn groups (and “sponsor” a couple). In one of those groups last week, a member said they were interviewing potential new 401(k) recordkeepers/advisers—and asked a provocative question: What is the one question that you will be sure to ask the next time that you interview potential 401(k) providers?

Of course, we all know that the search for a new provider entails a lot more than a single question. And, as I skimmed my way through the suggestions that had already been proffered, there were a number of important and familiar inquiries; things having to do with the fees charged, fee disclosure, the quality of support staff, willingness to stand in as a plan fiduciary…. These are all important—so important, in fact, it was hard to imagine that they wouldn’t be routinely included in even the most casually composed RFP.

Having read the question—and skimmed the answers—I was about ready to move on. Ironically, the way this question was phrased (or at least how I read how that question was phrased) intrigued me; what WAS that one question I would ask the next time?

Now, having spent a fair amount of my career on the other side of that question (including a period of time when the group that prepared RFPs for a large financial services organization reported to me), I can tell you there are a nearly infinite number of ways to respond “yes” (with a clear conscience) without really meaning "yes, all the time"; ways to gloss over things like high turnover, to offer broad organizational-level expositions designed to assuage nagging concerns about profitability or “commitment to the business”; even ways to assure, without committing, on the subject of whether the provider will "stand in" in the event of a lawsuit, audit, or investigation. None of which should discourage or dissuade one from asking those questions, of course.(1)

That said, when it comes down to that one question, I kept coming back to one that gets asked all the time. One that you probably asked on your last RFP. One to which you may have gotten a response, but, I suspect, not an answer.

The question I would ask is, Can I get the contact information for three clients that have left you in the last 18 months?

Not that you'll get it, though you might—or that the selections won't be "tailored"—but the response (or lack thereof) can, IMHO, be "enlightening."

—Nevin E. Adams, JD


(1) If you want to frustrate a potential provider, just make them respond to an RFP where the questions are worded such that the only acceptable answers are “yes” or “no” (or make them put their “explanations” in a separate document). What many (still) don’t seem to appreciate is that most advisers/consultants take all that fancy verbiage and filter it down to a checkbox on a spreadsheet anyway.

Decision Decisions

As a parent, you spend a lot of time telling your kids what to do, and perhaps more time than you think you should convincing them that it was their idea. If you’re lucky, you get to watch them make the “right” choices on their own—and to see them turn out well in the end. What you really try to avoid doing, certainly as they enter adulthood, is to make those decisions for them.

With defined contribution plans, over the last three decades or so, mostly we told workers what to do (or at least what people very much like them should do). And, despite a lot of hand-wringing to the contrary, most did. There were, of course, “holdouts”—a stubborn and/or inattentive group that resisted those entreaties, at least up until the point at which we did the right thing “for” them by automatically enrolling them in these programs. One might have thought that their resistance was thoughtful, perhaps principled, and maybe economic—and yet, survey after survey shows that those who were defaulted in stayed there. Were they lazy, afraid to make the wrong decision, unable to make any decision, or merely inattentive? Perhaps all of the above. Regardless, the debate about whether we should “impose” on them our sense of the right thing to do—to make that decision for the “recalcitrant” minority—would seem to be over.

The New Frontier

The new frontier in participant decision-making appears to be retirement income or, more precisely, helping individuals make arrangements for a suitable stream of income post-retirement. There is a general—and perhaps increasingly pervasive—sense that the solution to this challenge is already at hand (or could be with a tweak here and there): the annuity.

That assumption was in evidence last week at a presentation by a panel of behavioral finance academics at an event sponsored by Allianz (1). As part of its response to the Labor Department’s RFI on retirement income, Allianz had worked with the inimitable Schlomo Benartzi to assimilate a wide range of behavioral finance techniques to better understand participants’ reluctance to embrace annuities (at least in large numbers), and to help remedy “the annuity puzzle” (yes, it even has a name, apparently). Certainly from an academic perspective, there is no valid reason why an individual seeking a dependable stream of income in retirement wouldn’t take advantage of a product that purports to do just that. And yet, in the “real” world, individuals continue to defy those expectations.

All of which, to my ears, began to beg the question, Should we be helping participants to do the “right” thing about retirement income, as we did about retirement plan enrollment? Should we be making that decision for them as well?

It is an idea that is already “out there,” and one that seems of interest to the Obama Administration. Certainly there is a concern that many take their multiple defined contribution distributions between “now” and whenever retirement finally occurs in cash and deploy them for purposes other than retirement. This “leakage” from the system almost certainly depletes the accumulative effect of retirement savings for many younger and lower-income workers, leaving them to literally start over at their next place of employment (there is some evidence that larger balances accumulated by older workers are more routinely rolled over into tax-advantaged vehicles such as an IRA).

Which again leads one to ask, what WOULD be the harm in letting a default mechanism make the “right” decision for them, certainly so long as they could opt out? Hasn’t our experience with automatic enrollment shown not only that people are willing to let good decisions be made for them, but that they appreciate it as well?

We once resisted automatic enrollment as a design choice for reasons that seemed just as daunting: We didn’t know the “right” deferral percentage, weren’t sure how it should be invested, worried that it would lose value between the time it was withheld and (potentially) returned, and were bothered by the potential conflicts between state wage law and federal directives. The Pension Protection Act effectively resolved those issues, provided a structure for a valuable safe harbor protection, and yet managed to avoid mandating its approach. As a result, it’s more likely than ever that more savers will have more savings to manage at retirement, perhaps for longer in retirement, than would otherwise be the case.

Now, for most situations at present, the retirement income amounts involved may well be too small, the products available too expensive and/or complicated, the protections for employers and participants alike too vague, the portability and/or access to the funds frustratingly problematic. And, let’s face it: Current annuity designs (2) don’t really come in a convenient “trial size.”

Still, IMHO, we need to focus on creating workable, sound default decisions—because the alternative for many until we do will be making decisions by default.


—Nevin E. Adams, JD

(1)All in all, it was a fascinating presentation, and the report summary that accompanied it is well worth a read (see “Annuities Get a Behavioral Finance Makeover” ). Those reports included notions that workers, and especially older workers, pay too much attention to recent stock market movements, suffer from a “hyper” aversion to risk, and, after their mid-50s supposedly have a particularly tough time making complex financial decisions. All of which purported to explain not only why workers don’t make good investing decisions at retirement, but perhaps even to suggest that they wouldn’t want to (ironically, one study indicated that, given the opportunity to make an active decision to purchase an annuity, a surprisingly robust 49% did).

(2)For the record, I’ve no particular affinity for the annuity concept per se vis-à-vis an alternative that provides the reliable stream of income at retirement for a reasonable price, and no reason to think that an adviser-led participant solution couldn’t compete very effectively with an annuity, much as an adviser-led investment program can do as well (and perhaps better) as a qualified default investment alternative. Of course, every participant doesn’t have access to an adviser, and many don’t have accounts large enough to warrant those attentions—and we need solutions for those participants as well.

Question Errs?

Several years back, we decided that our family was ready to upgrade to a high-definition TV (in fairness, that “decision” was in no small part predicated on the untimely “death” of the big-screen projection TV that we had purchased not too long after we married).

So, I did what any reasonable consumer would do— – I went to my local appliance warehouse to see what was available. In short order, I was able to enlist the support of a trained professional (a “professional,”, it should be noted, who turned out to be younger than the TV that we were replacing). Not that he wasn’t helpful, after a fashion. But there in that “showroom,”, it was hard for me to see (or appreciate) all the subtle differences that purported to explain the occasionally significant variances in price. Moreover, he spoke in alien terms that were clearly something I was supposed to understand— – but didn’t. And, while I don’t mind probing for explanations, after a while, even the most diligent shopper gets tired of sounding – stupid. Ultimately, he was telling me the things that he (or the TV manufacturer) thought were important, – but I had no context for what those meant to me. Furthermore, while he seemed perfectly willing to answer any questions I had, - I didn’t even know the right questions to ask.

Like my broken projection-screen TV, when it comes to workplace retirement plans, – problems— – or, more accurately, a desire to remedy them— – all too often are the driving force behind making a provider change. But, while that “necessity” may force that shopping excursion (rousing many a too-busy plan sponsor from their daily challenges), it is precisely the wrong environment in which to make a thoughtful, reasoned, and, dare I say, prudent choice.

But, in the search/evaluation process, it’s worth noting that, IMHO, there is no "best" provider. There is, however, a best provider for each plan. That said, no matter how good a match you make today, odds are there will come a time when you will want—or need—to validate that decision. The reasons are myriad: circumstances change, people leave, programs grow, budgets fluctuate, and expectations expand. Oh, and if common sense alone were an insufficient reason, the Department of Labor itself reminds us that fiduciaries “should establish and follow a formal review process at reasonable intervals to decide if it wants to continue using the current service providers or look for replacements.”

But before you rush into the search process, it is imperative that you first understand what you are looking for.

IMHO, that process starts by understanding and evaluating the services you currently receive— – and knowing what you like and wish to preserve, – as well as what areas you’d like to improve and/or expand on. It starts by understanding and evaluating what you are currently paying for those services you currently receive, and deciding how much more you’d be willing (and perhaps able) to pay to expand those offerings.

And, yes, it starts by knowing what choices might now be available to you, – perhaps at little or no cost; – choices that you might not even think to ask about, choices that you might think are— – and perhaps once were— - beyond your price range.

It starts, as did my “search” for a new TV, with a sense of the right questions to ask.

Because knowing the right questions to ask is, IMHO, essential to getting the right answers.

- —Nevin E. Adams, JD